Bankruptcy Litigation Committee

ABI Committee News

 

Confidentiality in Chapter 11 Cases

In a recent case, a bankruptcy court approved the following provision in a confidentiality agreement:

Designation of Nonconfidential. For the avoidance of doubt, all information disclosed to the receiving parties under this confidentiality agreement, whether oral or in written form, shall be deemed confidential information unless specifically identified in writing as “nonconfidential.”

While protecting a debtor’s business information may be important, there is a growing trend toward using overbroad confidentiality agreements in large chapter 11 cases. This is contrary to the tradeoff made in filing a bankruptcy case—a debtor receives certain protections by filing for bankruptcy relief (including the imposition of an automatic stay), but, in return, must list all of its assets and liabilities on its schedules of assets and liabilities and file a detailed statement of financial affairs, both of which are subject to examination under Rule 2004. The use of overbroad confidentiality agreements in large chapter 11 cases can unnecessarily increase costs and make discovery during the case more difficult.

Historical Presumption in Favor of Public Access

U.S. courts have historically recognized a strong presumption of public access to court records. See, e.g., Nixon v. Warner Commc’ns Inc., 435 U.S. 589, 597-98 (1978). “This preference for public access is rooted in the public’s first amendment right to know about the administration of justice.” Video Software Dealers Assn v. Orion Pictures Corp. (In re Orion Pictures Corp.), 21 F.3d 24, 26 (2d Cir. 1994). It helps to protect “the integrity, quality, and respect in our judicial system,” In re Analytical Sys., 83 B.R. 833, 835 (Bankr. N.D. Ga. 1987), and permits the public to “keep a watchful eye on the workings of public agencies.” Nixon, 435 U.S. at 598.

The policy interest in favor of public access “is at its zenith where issues concerning the integrity and transparency of bankruptcy proceedings are involved.” In re Food Mgmt. Group, LLC, 2007 WL 458022, at *6 (Bankr. S.D.N.Y. Feb. 13, 2007); see also Gitto v. Worcester Telegram & Gazette Corp. (In re Gitto Global Corp.), 422 F.3d 1, 7 (1st Cir. 2005) (quoting Ferm v. U.S. Trustee (In re Crawford), 194 F.3d 954, 960 (9th Cir. 1999) (stating that unrestricted access to bankruptcy records “fosters confidence among creditors regarding the fairness of the bankruptcy system.”)).

This policy of open inspection, codified generally in §107(a) of the Bankruptcy Code, evidences Congress’s strong desire to preserve the public’s right of access to judicial records in bankruptcy proceedings. See Orion, 21 F.3d at 26. Section 107(a) of the Code provides that all papers filed in the case and the dockets of a bankruptcy court “are public records and open to examination by an entity at reasonable times without charge.” 11 U.S.C. §107(a). The legislative history of §107(a) confirms Congress’s general intent to keep access to judicial records open. Senate Report No. 989 states that §107(a) “makes all papers filed in a bankruptcy case and the dockets of the bankruptcy court public and open to examination at reasonable times without charge.” S. Rep. No. 989, 95th Cong., 2d Sess. 30, reprinted in 1978 U.S.C.C.A.N. 5787, 5816.

Moreover, on a purely practical level, the sealing of court records inflicts a costly nuisance on the judicial system. See City of Hartford v. Chase, 942 F.2d 130, 137 (2d Cir. 1991) (Pratt, J., concurring). Mechanical and logistical problems of sealing the files, finding extra space in the vault, satisfying handling requirements, plus the related direct and indirect costs, impose substantial burdens on the clerk’s office and on a judge’s staff. All these factors argue strongly for open access to court records in the bankruptcy court. See id.

In the case of In re Orion Pictures Corp., 21 F.3d 24, 27 (2d Cir. 1994), the Second Circuit explained that “[i]n most cases, a judge must carefully and skeptically review sealing requests to insure that there really is an extraordinary circumstance or compelling need.” Moreover, the Second Circuit emphasized that, “it is a basic tenet of our jurisprudence that court records are public and “open to examination by an entity at reasonable times without charge.” 11 U.S.C. §107(a); see, e.g., Lugosch v. Pyramid Co. of Onondaga, 435 F.3d 110 (2d Cir. 2006), (discussing Constitutional and common law rights of access to documents filed in court).

In Orion, the debtor sought to seal certain specific confidential commercial information consisting of the terms of a promotional agreement between the debtor and a major customer that the court determined would give competitors, who sought to make the information public a direct competitive advantage. The Second Circuit held that, under §107(b), protection is available if an interested party could demonstrate “that the information it sought to seal was ‘confidential’ and ‘commercial’ in nature.” Id. Of course, most would agree that the sealing of a single agreement with the debtor’s major customer is completely appropriate.

The Second Circuit held in Orion that §107(b) created a narrow exception to the general rule. Moreover, in Orion, the Second Circuit narrowly defined the term “commercial,” as used in section 107(b), as “information which would cause ‘an unfair advantage to competitors by providing them information as to the commercial operations of the debtor.’” 21 F.3d at 27 (quoting Ad Hoc Protective Comm. for 10 1/2% Debenture Holders v. Itel Corp. (In re Itel Corp.), 17 B.R. 942, 944 (B.A.P. 9th Cir. 1982)).

The Second Circuit further explained that “although the right of public access to court records is firmly entrenched and well supported by policy and practical considerations, the right is not absolute.” Orion, 21 F.3d at 27 (citing Lawrence P. King, Collier On Bankruptcy vol. 2107.01 (15th ed. 1993)). In limited circumstances, courts must deny access to judicial documents—generally where open inspection may be used as a vehicle for improper purposes. See, e.g., Nixon, 435 U.S. at 597 (citing In re Caswell, 18 R.I. 835, 29 A. 259 (R.I. 1893) (concluding that a court can insure that its records are not used to promote public scandal through publication of disgusting details of a divorce) and Schmedding v. May, 85 Mich. 1, 48 N.W. 201, 202 (Mich. 1891) (refusing to permit court records to be used as sources of business information that might harm a litigant’s competitive standing).

Blanket Confidentiality Orders

Some debtors are now taking the position that their entire business operation is confidential, such that if any of the information about its business were to be disclosed, it would give competitors a direct advantage. Such a position is untenable. Debtors have a legitimate interest in protecting their trade secrets, which also benefits creditors (e.g., disclosure of the secret formula would reduce the value of the business). However, in most circumstances, the information for which protection is sought does not require the level of requested protection. Blanket confidentiality orders should not be allowed in most cases for several reasons.

First, blanket confidentiality orders impermissibly allow the debtor to have too much control over the flow of information. Creditors and their professionals with a direct interest in the case should be allowed access to all information after signing a non-disclosure agreement of some kind. If a blanket confidentiality order is in place, debtor’s counsel will likely have to review all of the claimed “confidential” information before it is disseminated, thereby driving up the cost to the estate.

Second, establishing conditions severely limiting the use of the information during the case unnecessarily drives up the cost for creditors who are seeking to use that information for legitimate purposes, including the exercise of their rights under the Code, such as seeking the appointment of a trustee. For example, creditors may be required to redact information from their pleadings or file them under seal by separate motion or to redact portions of transcripts of depositions containing the claimed confidential information or keep them separate from other portions of the transcripts.

Third, in addition to significant costs involved, having to deal with onerous confidentiality restrictions can cause a significant delay in the provision of the requested information at the time when it is needed. In large, fast-moving chapter 11 cases, this gives the debtor an unfair competitive advantage to stay one step ahead of its creditors since the creditors cannot get the requested information in time to effectively make use of it. In sum, when debtors are allowed to claim that “all” information relating to their business operation is confidential, it permits the debtors to control the flow of information and put onerous conditions about when, where and how it is used.

The Second Circuit explained in Orion that “Congress…has recognized that under compelling or extraordinary circumstances, an exception to the general policy of public access is necessary.” Orion, 21 F.3d at 27; See, e.g., Fed. R. Crim. P. 6(e)(2) (secrecy of grand jury proceedings); 5 U.S.C. §552(b)(1) (provision of FOIA that exempts from disclosure material affecting the national defense); Fed. R. Civ. P. 26(c)(5)-(8) (sealing of depositions and restrictions on revealing trade secrets or other confidential information). However, the court cautioned that, in most cases, a judge must carefully and skeptically review sealing requests to insure that there really is an “extraordinary circumstance or compelling need.” Id. at 27 (citing Chase, 942 F.2d at 135-36).

Bankruptcy courts must be wary of approving blanket confidentiality orders of this type. As the Second Circuit suggested, bankruptcy judges must carefully and skeptically review sealing requests to insure that there really is an extraordinary circumstance or compelling need for them, and if so, seek to limit the information that is restricted. Otherwise, the significant costs and delays that will be incurred will severely disrupt the bankruptcy process and make for a difficult case.